AUSTRALIA – Grain and commodities storage company, GrainCorp has announced that it has signed a 10-year contract to manage the risk associated with the volatility of eastern Australian winter grain production.

The deal targets to reduce cash flow and earnings volatility resulting from severe drought in some parts of Australia.

“The purpose of the Contract is to smooth GrainCorp’s cash flow and earnings across volatile east coast Australia grain harvests.

“As a result, the Contract will have several benefits for GrainCorp and its shareholders including a reduction in cash flow volatility, particularly in periods of severe drought,” said GrainCorp.

The contract will take effect from the 2019-20 financial year, during which a fixed payment of A$15 (US$10.50) per tonne will be made for each tonne of winter grain in any given year that meets the following criteria:

Below an agreed lower production threshold of 15.3 million tonnes: GrainCorp receives the production payment, subject to an annual maximum of A$80 million;

Above an agreed upper production threshold of 19.3 million tonnes: GrainCorp pays the production payment, subject to an annual maximum of A$70 million; and

In all cases, subject to an aggregate net limit of production payments to either GrainCorp or the contract counterparty of A$270 million over the 10-year term.

GrainCorp said the total pre-tax annual cost of the contract, excluding the production payments, is expected to be less than A$10 million.

According to GrainCorp’s CEO Mark Palmquist, the contract will smooth the company’s cash flow and allow for longer term capital allocation and business planning through the cycle.

In April, GrainCorp unveiled plans to demerge its global malting business called MaltCo to enable a more strategic focus on the division.

The restructuring will form two separate businesses to create one of the world’s leading malting business and a stand-alone Australian-focused grains business.

In the first half of fiscal 2019, GrainCorp reported A$27 million (US$18.89 million) in underlying EBITDA, down from A$119 million (US$83.28 million) in the same period a year ago impacted by severe drought conditions in eastern Australia.